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Functional  and  Unit  Cost  Accountinjj^ 

for  Municipalities  and  Its 

Application  by  the  City 

of  New  York 


By  FRANKLIN  M.  EARNED 

Accountant,  Bureau  of  Municipal  Investigation  and  Statistics 
Department  of  Finance,  The  City  of  New  York 


PRESENTED     BY 


WILLIAM    A.    PRENDERGAST 

Comptroller 


JUNE,    1916 


-,  rt-' 


T^-7"/7 


FUNCTIONAL     AND     UNIT     COST     ACCOUNTING     FOR 

MUNICIPALITIES  AND  ITS  APPLICATION 

BY  THE  CITY  OF  NEW  YORK. 


Paper  read  at  the  Eleventh  Annual  Convention  of  the  National  Association 
of  Comptrollers  and  Accounting  Officers,  held  at  Syracuse,  N.  Y.,  June  1,  1916. 

By  Franklin  M.  Harned^ 

Accountant,  Bureau  of  Municipal  Investigation  and  Statistics,  Depart- 
ment OF  Finance,  The  City  of  New  York. 

Most  men  think  of  cost  accounting  as  something  of  a  very  complicated  nature, 
quite  unintelligible  to  the  average  citizen.  It  will  help  me  in  what  I  am  about  to 
say  if  you  will  consider  municipal  cost  accounting  as  merely  the  following  of 
the  assets  of  a  city  until  they  are  finally  disposed  of.  Some  will  go  into  roads, 
some  into  buildings  and  into  other  works  of  a  permanent  nature.  Other  assets 
will  be  expended  for  public  service,  such  as  protection  to  life  and  property,  for 
education,  for  the  care  of  the  poor,  etc.  It  is  comparatively  easy  to  check  the 
cost  of  most  construction  work.  Given  the  kind  of  building  and  its  cubical  con- 
tents or  the  class  of  road  and  the  number  of  miles,  data  can  be  had  to  give  a  fair 
estimate  of  its  cost. 

As  a  rule,  however,  the  greater  part  of  municipal  expenditure  is  for  per-  x 
sonal  service  and  for  supplies  and  materials  for  which  we  have  at  the  end  of  the 
year  no  tangible  assets — nothing  upon  which  we  can  lay  our  hands.  How  to 
measure  such  expenditures,  how  to  make  them  produce  the  largest  benefit  per 
dollar  spent  is  our  problem,  for  in  practically  all  of  our  larger  American  cities 
the  tax-budget  appropriations  are  increasing  far  more  rapidly  than  is  the  popu- 
lation or  the  property  values. 

Few  of  our  cities  are  able  to  show  more  than  the  fact  that  in  a  certain  year 
they  have  raised  so  much  money  and  spent  so  much  money  and  have  so  much 
left.  The  budgets  of  most  of  them  are  based  upon  the  expenditures  of  the 
preceding  year,  these  amounts  being  increased  in  many  instances  by  a  more  or 
less  generous  percentage  to  provide  for  estimated  additional  requirements. 

The  defect  here  is  the  assumption  that  all  the  expenditures  of  the  preceding 
year  were  actually  necessary  and  there  is  the  further  fault  that  the  expenditures 
for  stores  often  vary  widely  from  the  amount  actually  consumed  or  made  of 
actual  service.  New  York  has  been  through  this  experience  and,  believe  me, 
it  has  been  a  costly  one.  How  then  shall  we  get  away  from  it  ?  Obviously,  the 
mere  conviction  that  something  is  wrong,  that  the  expenses  of  government  are 
too  high,  does  not  help  much.  Just  as  obviously,  before  remedies  can  be  intelli- 
gently applied  to  excessive  expenditures,  some  agency  must  point  out  the  specific 


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expenditures  at  fault.  This  agency,  some  of  us  feel  certain,  is  proper  cost 
accounting.  It  has  been  of  great  value  to  many  industrial  enterprises.  Largely 
because  of  their  rapid  growth  and  great  size  it  is  impossible  for  any  one  man, 
without  proper  records  and  reports,  intelligently  to  follow  the  activities  of  such 
enterprises  and  to  grasp  readily  defects  in  policy  or  in  administration.  Indus- 
trial concerns  by  reason  of  competition  and  to  maintain  necessary  credit  or  bor- 
rowing power  have  been  compelled  to  install  cost  accounts.  Municipalities,  largely 
because  they  have  practically  a  perpetual  income  in  the  way  of  taxes,  have  been 
slower  to  adopt  such  methods. 

From  the  municipal  standpoint,  the  main  purposes  of  cost  accounting  are : 

1.  To  point  out  inefficient  service  and  management  and  wastes  in 
materials  and  supplies. 

2.  To  provide  a  standard  cost  of  service  and  thus  provide  a  check 
on  future  costs. 

3.  To  show  whether  it  is  costing  more  to  manufacture  an  article 
or  to  perform  a  service  than  it  would  cost  to  buy  it. 

The  title  of  this  paper  speaks  of  functional  and  unit  costs.  We  might  treat 
the  maintenance  of  an  entire  city  as  a  function  of  government,  and  we  might 
treat  the  maintenance  of  the  departments  of  health  and  of  street  cleaning  as  sub- 
functions  of  this  main  function.  So,  too,  we  might  divide  the  activities  of  each 
of  these  departments  into  various  functions.  These  functions  in  the  department 
of  street  cleaning  we  might  classify  as  the  care  and  maintenance  of  stables,  the 
feeding  of  the  horses,  the  sweeping  of  the  streets,  the  collection  of  ashes  and 
rubbish  and  garbage,  and  the  final  disposition  of  them.  ,If  we  divide  the  costs 
of  each  of  these  functions  by  the  number  of  work  units  performed,  we  arrive 
at  unit  costs;  for  example,  the  total  cost  of  collecting  ashes  divided  by  the  num- 
ber of  cubic  yards  collected  would  give  us  the  cost  per  cubic  yard. 

As  to  the  use  and  value  of  unit  costs,  let  us  consider  the  maintenance  and 
care  of  stables.  We  might  compare  the  unit  costs  of  stable  "A"  in  1915  with 
the  unit  costs  of  the  same  stable  in  1914,  or  we  might  compare  the  unit  costs 
of  stable  "  A  "  in  1915  with  the  costs  of  stable  "  B  "  in  the  same  year.  We  will 
assume  that  the  respective  costs  of  stable  "  A  "  and  stable  "  B  "  differ  widely 
in  1915.  We  seek  the  reasons  for  these  variations.  One  reason  might  be  the 
use  of  stable  "  A  "  to  its  full  capacity ;  of  stable  "  B  "  to  only  part  of  its  capacity. 
Other  reasons  might  be  a  difference  in  the  cost  of  repairs,  due  perhaps  to  a 
difference  in  the  ages  of  the  stables,  or  owing  possibly  to  careless  management, 
or  there  might  be  too  many  mechanics  to  find  work  for;  there  might  be  more 
hostlers  or  stablemen  in  one  stable  in  proportion  to  the  number  of  horses  than 
in  the  other  stable;  the  number  of  foremen  might  also  be  disproportionate;  the 
cost  of  stable  supplies  might,  too,  differ  very  widely. 

First  we  must  satisfy  ourselves  as  to  what  is  a  fair  cost  for  each  variety  of 
service,  and  then  try  to  decrease  it,  or  at  least  prevent  it  from  increasing. 

Another  method  of  comparison  is  the  matching  up  of  the  cost  of  the  service 
with  the  value  of  the  articles  to  be  conserved.  The  cost  of  the  receipt  and 
storage  and  distribution  of  stores  is  oftentimes  too  great  a  percentage  of  the 


value  of  the  stores.  This  may  mean  too  many  employees,  too  frequent  deliveries, 
too  many  storage  points,  or  too  small  a  quantity  of  stores  at  a  certain  point  to 
warrant  the  overhead  expense  in  connection  with  them.  The  cost  of  repairs  to  the 
value  of  the  equipment  repaired  may  also  be  so  great  a  percentage  as  to  indicate 
that  the  equipment  should  have  been  replaced  with  new  equipment. 

The  percentage  of  the  cost  of  administration  and  supervision  may  also  be 
very  excessive  as  compared  with  the  cost  of  wages  and  materials  entering  directly 
into  the  cost  of  service  performed.  Expenses  other  than  direct  expenses  are  very 
apt  to  be  overlooked  when  the  cost  of  governmental  and  municipal  work  is  com- 
pared with  the  cost  of  that  done  by  private  concerns.  I  might  mention  two  recent 
instances  of  this  kind.  The  Federal  government  proposed  to  build  its  own  armor 
plant,  basing  its  action  partly  upon  the  assertion  that  whereas  the  Bethlehem 
Steel  Company  charges  $395  a  ton  for  armor  plate,  the  government  can  manu- 
facture it  for  $263,  a  saving  of  $132  a  ton.  The  Bethlehem  Steel  Company 
says,  however,  that  the  figure  estimated  by  the  government  makes  no  allowance 
for  administration  and  general  expense,  for  insurance,  taxes  and  depreciation  of  • 
plant,  or  for  interest  on  investment  and  working  capital — that  the  government's 
figure  represents  merely  shop  cost.  It  is  also  assumed  that  the  government  plant 
will  be  run  at  full  capacity,  which  is  not  usually  the  case  with  a  private  plant  of 
this  nature. 

The  other  instance  I  have  in  mind  is  the  Cleveland,  Ohio,  municipal  lighting 
plant.  The  National  Municipal  Review  states,  April,  1916,  that  it  is  claimed 
for  this  plant  that  for  the  first  seven  months  of  1915  it  showed  a  profit  of  $33,000. 
The  private  company  operating  there  contends,  however,  that  in  the  municipal 
accounts  too  little  reserve  has  been  set  aside  for  depreciation,  that  not  enough 
has  been  charged  for  interest  on  investment,  and  that  a  sinking  fund  reserve 
has  been  neglected.  It  asserts  that  if  these  expenses  had  been  provided  for  the 
result  would  have  been  not  a  profit  of  $33,000,  but  a  loss  of  $81,000  in  the  period 
mentioned.  Assuming  these  figures  are  true,  such  a  policy  of  governmental  and 
municipal  service  would  be  disastrous  both  to  the  private  concerns  affected  and  to 
the  taxpayers ;  for  it  would  tend  to  depreciate  the  value  of  the  property  of  the 
former  and  to  create  a  continuous  deficit  to  be  met  by  the  latter.  Apply  the 
same  overhead  conditions  to  municipal  repair  shops,  asphalt  plants,  etc.,  and  I 
am  inclined  to  think  that  they,  too,  would  in  many  cases  be  found  anything  but 
profitable  enterprises. 

Now  as  to  the  requirements  of  a  cost  accounting  system  these  things  are 
necessary : 

1.  A  classification  of  the  functions,  the  costs  of  which  are  to  be  \ 
ascertained.  ^^ 

2.  Time  records  which  will  show  the  specific  service  rendered  and  \, 
the  time  actually  spent  upon  it.  "^ 

3.  Stores  records  which  will  show  the  quantity  and  value  of  stores  ^ 
disbursed  for  each  function. 

4.  Records  showing  charges  which  are  for  neither  personal  service   \ 
nor  stores,  such  as  work  done  by  contract,  rent,  light,  heat  and  power.     / 
If  we  are  to  compare  municipal  costs  with  private  costs,  it  is  vital  that  we 


also  consider  interest  on  the  city's  investment,  the  loss  of  taxes,  deprecia- 
tion, etc. 

5.     Adequate  statistics  to  arrive  at  unit  costs — so  many  people  fed, 

/     so  much  surface  of  street  cleaned  or  repaired,  so  many  cubic  yards  of 

\    ashes  removed,  the  value  of  the  stores  cared  for  or  disbursed,  the  direct 

cost  of  work  performed,  as  a  basis  for  reckoning  the  percentage  of  the  cost 

of  supervision,  etc. 

Records  of  this  sort  have  been  set  up  in  practically  all  of  the  larger  depart- 
ments of  The  City  of  New  York  and  in  many  of  the  smaller  ones  and  the  exten- 
sion of  the  work  is  still  in  progress. 

An  idea  of  the  functional  classification  may  be  had  from  those  applied  to 
the  four  hospitals  of  The  City  of  New  York  included  in  the  department  known 
as  Bellevue  and  Allied  Hospitals. 

The  function  General  Administration  for  all  hospitals  is  divided  into  the 
sub-functions — Executive,  Audit  and  Accounts,  Purchase  of  Supplies,  and  Engi- 
neering Supervision. 

The  main  classifications  of  the  individual  hospitals  are:  Administration, 
Professional  Care  of  Patients,  Kitchens,  Dining  Rooms  and  Pantries,  House- 
keeping, Plant  Service,  Ambulance  Service  and  Dispensary. 

These  classifications  are  further  subdivided.  I  will  give  but  one  example, 
Professional  Care  of  Patients,  the  sub-classifications  of  which  are:  Admitting, 
Wards  and  Operating.  Convalescent  Relief,  Pharmacy,  X-Ray  Laboratory,  Train- 
ing School,  Women  Nurses ;  Training  School,  Men  Attendants ;  Training  School, 
Midwives.  And  for  each  of  these  items  is  shown  the  cost  of  the  personal  service, 
supplies,  etc.,  applied  to  it. 

The  total  cost  of  hospital  service  is  divided  by  the  total  days'  treatment  to 
secure  the  cost  per  patient  per  diem.  The  dispensary  cost  is  reduced  to  a  cost 
per  treatment. 

Work  of  this  nature  is  apt  to  meet  with  opposition  in  proportion  to  the 
need  of  it.  It  is  reported  to  have  been  said  in  one  of  the  county  offices  that  no 
such  accounting  system  was  wanted  there;  the  office  would  lose  half  its  force. 
Others  think  that  to  explain  on  a  time  record  just  what  they  did  and  how  long  it 
took  them  to  do  it  is  beneath  their  dignity.  Still  others  think  they  can  get  the 
same  results  as  can  be  had  from  the  time  records  by  arbitrarily  assigning  the  time 
of  numerous  employees  to  the  various  functions  performed.  Needless  to  say, 
their  records  do  not  bear  out  their  optimistic  views.  Some  object,  too,  to  the 
additional  office  work  the  collecting  of  the  costs  and  the  necessary  statistics  will 
entail,  although  this  in  no  case  should  be  great,  and  can,  for  the  most  part,  be 
done  by  mere  clerks. 

Some  of  the  matters  brought  to  our  attention  directly  or  indirectly  by  this 
cost  accounting  are: 

1.  The  need  from  the  standpoint  of  economy  of  centralizing  many 
of  our  offices.  We  have  for  instance  within  our  municipal  borders  five 
complete  county  organizations,  five  highway  bureaus,  five  sewer  bureaus, 
four  park  departments,  three  street  cleaning  organizations,  and  so  on. 


Instead  of  having  a  central  purchase  bureau,  practically  every  department 
does  its  own  buying.  Many  of  the  departments  with  considerable  repairs 
to  make  have  one  or  more  repair  shops.  Much  of  our  accounting,  too, 
I  regret  to  say,  is  duplicated.  Just  how  much  could  be  saved  by  consolidat- 
ing these  activities  I  cannot  say.    It  would  appear  to  be  a  great  sum. 

2.  The  revenues  from  two  of  our  productive  activities  are  barely 
enough  to  carry  them.  In  the  Dock  Department  some  of  the  docks  were 
leased  too  cheaply  and  there  were  unnecessary  charges  for  maintenance 
and  operation.  In  connection  with  the  water  supply  plant  it  was  developed 
that  50  per  cent,  of  the  gross  revenues  was  derived  from  26  per  cent, 
of  the  total  water  supply.  This  would  indicate  the  advisability  of  extend- 
ing the  metering  of  water,  now  substantially  confined  to  business  houses, 
to  apartment  houses  and  private  residences.  The  better  we  can  conserve 
the  water  supply  the  longer  can  we  defer  seeking  an  ever-increasingly 
expensive  additional  supply.  As  conditions  are  now,  all  the  water  wasted 
in  apartments  and  private  houses  by  defective  plumbing,  by  leaking  fau- 
cets, by  the  unnecessary  flow  to  secure  coolness  in  summer  and  to  prevent 
the  freezing  of  pipes  in  winter,  falls  upon  the  city.  Were  each  water 
user  compelled  to  bear  the  cost  of  his  own  carelessness  or  improvidence, 
the  result  to  the  city  would,  I  feel  sure,  be  very  pleasing. 

3.  The  excessive  overhead  costs  for  supervision,  engineering,  ac- 
counting, etc.,  have  led  to  heavy  reductions  in  force  in  several  depart- 
ments. Especially  has  this  been  the  case  where  heavy  reductions  in  con- 
struction work  were  not  followed  by  corresponding  reductions  in  the 
construction  forces. 

4.  The  excessive  cost  of  repairs  has  led  to  the  reduction  of  repair 
shop  forces.  In  one  instance  the  cost  of  repairs  to  one  piece  of  equip- 
ment which  cost  originally  $800  amounted  in  one  year  to  over  $1,300. 
The  mechanics  simply  had  nothing  else  to  do. 

5.  The  cost  of  receiving,  storing  and  disbursing  stores  was  in  many 
instances  too  great.  Some  of  these  excessive  costs  have  been  reduced; 
CTthers  will  be. 

6.  The  unit  costs  of  doing  various  work  have  been  reduced  because 
comparison  with  other  unit  costs  of  similar  nature  showed  them  to  be 
too  high. 

7.  Some  of  the  work  formerly  done  by  city  employees  it  is  now 
proposed  to  do  by  contract. 

In  conclusion  I  would  say  that  in  my  opinion  most  municipalities  would  be 
benefited  by  work  of  this  nature,  if  it  is  tmdertaken  at  first  in  a  simple  and  inex- 
pensive way.  A  simple  system  can  be  extended  later,  if  desirable,  but  one  unduly 
complicated  should  be  avoided  at  the  start.  Let  the  results  shown  by  the  simple 
system  justify  the  amplification  of  it. 

We  have  made  a  beginning  only.  Doubtless  we  shall  remodel  our  classifi- 
cations from  time  to  time,  and  doubtless  the  analysis  of  new  data  put  before  us 
from  time  to  time  will  give  us  new  viewpoints  and  lead  us  to  further  savings. 
It  should  be  borne  in  mind,  however,  that  cost  accounting  can  do  no  more  than 


point  out  the  weak  spots.  So  far  as  the  reports  are  delayed,  so  far  as  the 
defects  disclosed  are  uncorrected,  so  far  will  the  monies  expended  on  cost  account- 
ing be  wasted. 

If,  however,  you  are  really  bent  on  economy,  it  will  pay  you  to  give  this 
subject  earnest  consideration.  Unfortunately^  if  you  really  need  a  cost  account- 
ing system  you  pay  for  it  whether  you  install  it  or  not. 


M.  B.  Brown   Printing  &  Binding  Co., 
37-41    Chambers    Street,    N.    Y. 

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